Where do I belong? Four ways to determine if you are an employee or an independent contractor

We often see employees come in with contracts stating that they are independent contractors, which they may have signed without understanding the repercussions of that designation. Figuring out whether a worker is an independent contractor or an employee according to the law is a fact-specific determination, and is often a challenge. On top of this, even if the business and the worker agree on one designation or the other, their mutual understanding of the working relationship may not be supported at law. And it is important to figure out where you stand at law, as the consequences of being wrong can be significant.

So, how does the law determine whether a worker is an employee or an independent contractor? Courts will do a thorough assessment of a worker-business relationship, which comprises elements from each of the following common law tests:

1. Control: This test is the most frequently relied upon. It assesses the degree of control of the employer over the worker. In assessing this, one has to consider the amount, nature, location and management of the work. Who dictates the hours? The way the work is done? Can the worker subcontract or delegate the work? There is not one single factor that is the most important, but rather it is control of the work as a whole that helps in determining if it is an employer-employee or independent contractor relationship.

2. Economic Reality: This factor looks at which party bears the ultimate risk of loss or profit from the work. If it is the business who ultimately bears the risk, then that leans towards an employer-employee relationship. On the other hand, if the worker is the one bearing the risk (for example, they are doing the work for a set price), then the worker is more likely to be deemed a contractor.

3. Ownership of Tools: Who provides the tools of the job? If it is the worker, then this is an indicator of a contractor relationship. If it is the business, then it is more likely an employer-employee relationship. This also applies to vehicles: if a vehicle is required for the position, who is providing the vehicle? If the worker’s vehicle is used, is there some payment from the business for the use of the vehicle? Also, remember, when speaking of tools we generally think of actual tools. In the digital age, however, tools can include software, patented processes, apps, and many other digital tools.

4. Organization/Integration: This considers where the worker fits within the organization. If the worker is integrated into the business’ organization and the services are integral, they are more likely to be an employee. If the services are ancillary or separate, then the worker might instead be considered a contractor.

It is a common mistake that a worker’s status is a settled matter in the contract language: if both parties sign a contract stating that the worker is an independent contractor, then that is what they are, right? Not necessarily: your contract is not the final say. Even if a contract deems a worker to be an independent contractor, this does not automatically mean that the worker is in fact one. However, contractual language does help in making such a determination. Below are a few criteria that may indicate that the worker is an independent contractor:

Business does not deduct income tax, CPP or EI;

Worker is not exclusive to that business, and can work for other businesses;

Worker submits an invoice for the work performed and charges the appropriate tax; or

Worker sets own hours and is not actively supervised.

It is important to determine your status in relation to the business, as the repercussions can be widespread. For example, in an employer-employee relationship, it is the employer who is legally obligated to deduct, contribute, and remit payroll deductions on behalf of their employees. Such deductions include income taxes, pension contributions, and insurance premiums. But there is no obligation on the business to make such deductions on your behalf if you are an independent contractor. Where neither you nor the business are making the necessary deductions, the Canada Revenue Agency will determine who is liable for such payments and may insist on payment of significant penalties, interest, and possibly legal fees.

Status as an independent contractor versus an employee also affects your rights under any workplace safety and insurance legislation, which is important if you are injured on the job. If neither party is paying the premiums, there may be a requirement for retroactive payment of unpaid premiums, interest, and fines. Additionally, this type of situation can lead to increased future premiums.

Your status as an independent contractor versus an employee will also affect your entitlements if the business terminates the relationship with you. An independent contractor relationship is a contractual one for which you are not entitled to notice, or pay in lieu of notice, unless an entitlement to same is laid out in the contract. As an employee, however, you would have access to the employment legislation in your jurisdiction and any rights it confers, including such things as overtime, maternity/parental leave, notice and/or severance.

Whether you are an employee or an independent contractor drastically affects not only your rights, but also your liabilities. The above list is a guide to help you to make the determination, but each case will ultimately turn on the very specific circumstances and facts of your situation.